By any reasonable account, Amazon.com (AMZN +3.83%) is firing on all cylinders. The e-commerce giant is coming off a record year, where it posted more than $3 billion in net income on 31% revenue growth to $178 billion. The stock jumped 56% last year and is up another 34% in 2018, meaning it's more than doubled since the beginning of 2017.
The company has big plans to disrupt even more industries with its acquisition of Whole Foods and plans to launch a health insurance company with JPMorgan Chase and Berkshire Hathaway. Meanwhile, the company is developing a multibillion-dollar advertising business and is set to reap benefits as regulators are set to allow drone delivery to become a reality.
However, while much of the Amazon machine seems to be spinning closer to world domination, there's one part of its business that is noticeably lagging: the international market. Last year, the company made nearly $3 billion in operating income in North American e-commerce and another $4.3 billion from its cloud computing division Amazon Web service, but lost more than $3 billion from its international e-segment.
Amazon has never been profitable abroad and growth in its international market has consistently lagged behind that of North America. Last year, international sales grew only 23% compared to 33% in North America, though the North American segment benefited from the acquisition of Whole Foods.
Image source: Amazon.com.
Trouble on the road
For a long time, Amazon's domestic business was only borderline profitable, but profits have ramped up in recent years as the company has reached a density level and tipping point to achieve that goal. It has over 100 warehouses around the country in and around major metro areas that make two-day delivery with its Prime program possible. Shipping costs have fallen as it's opened warehouses closer to its customers. Meanwhile, its massive customer base has made its platform attractive to merchants who generate wide profit margins for Amazon through commissions and programs like Fulfillment by Amazon, in which Amazon handles storing and shipping merchants' inventory. The advertising business, another outgrowth of its e-commerce dominance, has also helped beef up its domestic bottom line.
Outside of North America, Amazon does not have the same set of advantages. Born at the dawn of the internet, Amazon was a first mover in the U.S., and never really had a strong direct e-commerce competitor in this country. Sure, there's eBay, but the auction site operates with a much different model and caters to a different kind of customer.
Outside the U.S., however, Amazon faces competition from entrenched e-commerce operators, including MercadoLibre in Latin America, FlipKart in India, Alibaba and JD.com in China, and Rakuten in Japan. Considering the size of the international market, it is also much harder for the company to achieve the level of density and penetration with the warehouses it has in the U.S. For instance, its international sales comprise half of its North American total, and the company only has about half the property for fulfillment and data centers abroad that it does in North America. The company has blamed its expanding international losses on spending to expand its fulfillment network as well as technology, content, and marketing. Investors should be aware that most of its international sales come from the Germany, Japan, and the U.K., but Amazon still sees significant opportunities in the rest of the world, especially in India, where it's investing billions. Still, building out its network of warehouses to enable Prime two-day delivery will continue to add significant expenses.
Are profits ahead?
Amazon may already be profitable in its more mature international markets like the U.K., Germany, and Japan, but the company has been confronted with regulatory and competitive challenges in other markets. Amazon seems to be counting on Prime Video to recruit new customers as a recent report by Reuters showed that its video investments have led to 5 million members joining the service, and CEO Jeff Bezos has said he wants a Game of Thrones-like hit that will appeal to audiences around the world. That seems to be what the company has in mind with its move to turn Lord of the Rings into a television series.
Amazon has always been willing to sacrifice profits for market share, and it seems to be operating with the same playbook internationally. Though investments in warehouses, video content, technology, and marketing add up, that formula has been overwhelmingly successful in the U.S. Stiffer competition and other headwinds abroad mean it will take the company longer to get there, but I wouldn't expect its international loss to expand forever. Cutting down on that $3 billion shortfall would be the easiest way for Amazon to grow its profits.
